Explanation

To determine relative valuation, we need to compare Company X's P/E ratio with Company Y's P/E ratio:

Company X:

• EPS = $2.00
• Stock price = $33.00
• P/E ratio = $33.00 / $2.00 = 16.5

Company Y:

• P/E ratio = 18

Analysis:

• Company X P/E = 16.5
• Company Y P/E = 18

Since both companies have similar operating and financial profiles, they should trade at similar P/E multiples. Company X has a lower P/E ratio (16.5) compared to Company Y (18), which suggests Company X is undervalued relative to Company Y.

If Company X were fairly valued, it should trade at a P/E of 18, which would imply a stock price of $2.00 × 18 = $36.00. Since it's trading at $33.00, it's undervalued by approximately 8.3%.